So You Think You Know GM?

24 November 2016

General Motors: America’s Former Darling

GM was founded in 1908. For much of the next 100 years they were the darling of America. The car was a symbol of American prosperity and a key purchase for any family hoping to achieve the “American Dream”

GM, along with other car makers like Ford, were single-handedly responsible for driving the economy in Detroit and much of small town America. In the 1960s and 1970s, working for a auto manufacturer was an above average job. It paid well, provided benefits and a pension while also requiring little formalized education.

In recent years much of that has changed. The auto industry has found cheaper labour elsewhere. They’ve been bailed out by the government. Detroit as a city has gone bankrupt.

GM specifically, received $50 billion dollar from the US government after they were on the brink of bankruptcy in 2009.

As an investor, these are all signs of a company you want to stay far away from. A declining industry, poor financial management, and too much debt.

But that was the “old GM”.

The “new GM” is much more interesting of a company for value investors.

The company has changed. The management team has changed. They’ve revamped their product line. Their balance sheet has much less debt. Investors have yet to pay attention. GM’s stock yields a dividend of 4.5%, but their Price to Earnings Ratio is only 3.8x. For a company with a new and clear strategy and a healthy balance sheet, this is a good opportunity for investors.

The problem is that investors remember all too well the horrors of the company’s performance during the financial crisis. They unfairly expect the company to go through the same struggles as they did before. In the 3Q of this year, the company increased operating income and profits about 10% year over year. For most companies this would be a great result. But GM’s stock is still down 3.5% over the course of the year.

Investors keep expecting the bad times to return once again.

What does this mean for you? It means that you can by into this company for less than what it’s really worth. When investors realize that the performance of the past has very little to do with the company’s performance into the future, investors today will be able to ride the momentum into a nice and healthy return.

As you sit on the nice 4.5% dividend yield, remember that it will only take 3.8 years for the company’s earnings to generate the price you paid. Not a bad value investment idea if you ask me.

What if we compare this to Tesla? A company that is all of the rage these days. Currently Tesla doesn’t pay a dividend. They also don’t make any money. The future growth prospects are there, but when the company has a P/E of ~70x for their 2018 earnings, this may be a tad unrealistic.

I’d take GM any day of the week.

Disclosure: I am not a registered investment professional. This article encases my opinion on the company and is not a recommendation for purchase. Please consult a registered professional before making any purchases.